Today we look at three more, but one word of encouragement before we proceed. Reason 3 and 4 are wonky and dense, but bear with me because they are very important to determining if the Congressional Budget Office (CBO) incorrectly scored employer behavior under the ACA. If they have not, we could see the cost double or even triple for the tax credits/subsidies in Obamacare.

Reason #3: Different Treatment of Small Businesses:

The Massachusetts exchange can serve three sub-populations: Those with state-subsidized coverage making below 300% FPL without ESI, companies with fewer than 11 full-time equivalent (FTE) that are not subject to an employer mandate, and companies with 11-50 FTEs that are penalized for not providing insurance.

In contrast, the federal employer mandate kicks in at 50 FTEs and allows access for all companies (50-100 FTEs ) into an exchange in 2014, and requires access for companies with less than 100 FTE in 2016. Since the federal law advocates for much larger employers to be included in an exchange than are allowed in the Bay State, any Massachusetts-based economic modeling will be inherently limited.

The federal law also differs from Massachusetts when it comes to the penalty cut off for small companies and the size of the penalty. Massachusetts employers with 11 or more FTEs must offer a “fair and reasonable contribution” towards insurance. In other words, they must enroll 25% of full-time employees in the employer’s group plan or contribute at least 33% of each employee’s individual premium. Employers with 50 or more employees must fulfill both tests unless three-quarters of their employees are enrolled. Non-complaint employers must pay a $295 per worker per year fee.One can imagine the financial calculus for a company to expand or not with 9 employees in Massachusetts being economically different from that of a company with 49 FTEs (the standard set out in the ACA).

Therefore, if Massachusetts mimics the federal floor of 50 FTE+ in an exchange, Bay State companies with 11-50 FTE will be exempt from the employer penalty for the first time, and it will increase the incentive for them to drop coverage. Keep in mind this policy change is in the shadow of double digit premium increases over consecutive years, for many of these companies. This seemingly small change may erode the slight increase in employer offer rates seen in Massachusetts, and so highly touted by supporters of the law.

Even if Massachusetts employers were the exact same as their counterparts in New Mexico, these changing incentives mean that the Massachusetts experience tells you very little about employer behavior for the tens of millions of smaller businesses that employ less than 50 FTEs across the country.

Reason #4: Difference in Affordability Schedule and Penalty:

Affordability Schedule

Under the federal law, the percentage of an individual’s income required to be spent on insurance before being exempted from the penalty is higher than in Massachusetts.

Under Obamacare’s sliding scale, an individual is required to pay 2% of his or her income at 100 % FPL (just over $200 for an individual making $10,890) up to 9.5% of income at 300-400% FPL (just over $3,000 for someone making $32,670, or $4,000 at $43,560).

In Massachusetts, an individual pays nothing if their income is below 149% of the federal poverty level, 3% at 150% of FPL, 4% at 200 of FPL, and 5% of income at 250% of FPL. In other words, if you earn 100-400% of FPL in Massachusetts, you will pay more under the federal law, and have an incentive under federal rules to reject your employer’s coverage and go to the exchange instead.

Employer Penalty

While the employer penalty is eventually higher under the federal law –a few thousand per employee versus $295 in MA-- it may not be high enough to eliminate the incentive to drop coverage. An employer’s insurance costs become very predictable if they are simply paying a fine every year instead of offering coverage. Compare this to the unpredictable and ever-increasing average cost of offering private insurance-- almost $15,000 a year for a family in Massachusetts or $13,000 in New Mexico.

Reason #5: Strong Incentive to Drop under ACA

It is not hard to imagine employers doing the math and realizing they can drop coverage, give employees a raise, send them to the exchange to purchase the same or more generous insurance, and still come out ahead!

The House Committee on Oversight and Government Reform tried to estimate this exact calculation.

Table 1 shows the magnitude of the incentive for one-person and four-person households to prefer the PPACA’s health insurance tax credit to receiving health insurance through the workplace. The assumption underlying these estimates is that health insurance benefits reduce worker wages and that a company that failed to offer health insurance would have to increase wages in order to attract the same caliber of workers. –Oversight Committee

Cadillac Tax Could Accelerate ESI Dumping

Finally, the federal “Cadillac tax” on health insurance plans, a revenue source that Massachusetts did not have in its law, puts another major incentive on the table for companies to drop coverage starting in 2018. At a Pioneer Institute event two years ago, Jonathan Gruber went as far as to say that the explicit purpose of the tax was meant to wean the country away from employer based insurance.

He stated that the tax was purposely mislabeled, “calling it a tax on insurance plans rather than a tax on people, we all know its really a tax on people who hold those insurance plans” He continued by saying, “By starting it late (in 2018) we were able to tie the cap for the Cadillac tax to the CPI (consumer price index) not to medical inflation. What that means is that the tax which starts only taxing about the top 8% of health insurance plans, essentially amounts to over the next 20 years to basically getting rid of the employer exclusion for employer provided health insurance.”

Putting aside the merits of eliminating the tax advantaged nature of employer sponsored insurance for a minute, it should be underscored that this was never the goal of the Massachusetts law. It fact, advisors to former Governor Romney will tell you that the state-based reform was only adapting to the status quo in the federal tax code, not an attempt to change it.

As you can see, the federal law includes multi-layered incentives for employers to drop, none of which exist in the Massachusetts law. Without question, if dropped, most employees making under 400% FPL will find their way to an exchange, whether state or federally-run, to pick up the subsidy, ballooning the total cost of the law.

In the original estimates, CBO projected that 19 million residents would receive subsidies to the tune of $450 billion in the first ten years. (the Joint Committee on Taxation estimated 14 million by 2020.) Now CBO estimates that the subsidies will cost $809 billion between 2013 and 2022 (the $645 billion estimate in a January 2012 reportincreased by $164 billion after the SCOTUS ruling), costing well over $137 billion per year by 2021, becoming the 4th largest non-discretionary program after Social Security, Medicare and Medicaid. As Douglas Holtz-Eakin and Cameron Smith have estimated, in a now outdated paper from 2010, given the growing estimates coming out of CBO, upwards of an additional 38 million individuals could access subsidies because it makes financial sense for companies to dump.

Cornell University economists Richard Burkhauser, Sean Lyons, and Kosali Simon (Indiana University) wrote for the Employment Policies Institute on another method by which employers and employees can leverage health insurance tax credits to their advantage. The Oversight Committee report put it this way:

many workers will have a strong incentive to request their employer reduce the employer’s contribution to health insurance. This is because if the coverage is “unaffordable,” the employee will be able to qualify for subsidized coverage in a state exchange. Firms will set the employee’s premium contribution at a level that is affordable for high wage workers and unaffordable for low wage workers. This will result in high wage earners continuing to benefit from the tax exclusion for ESI while low wage workers qualify for tax credits because their premium contribution is “unaffordable.”40 The firms will be in compliance with nondiscrimination rules that require employers to offer the same coverage to all of their workers because the offer to each employee will be the same. The difference is the required employee contribution will be “affordable” for some workers in the firm and “unaffordable” for other workers in the firm. Burkhauser, Lyons, and Simon show that the net benefit for many workers and employers will exceed the penalty that many employers likely face for failing to offer health insurance, and their research also suggests that the CBO may have significantly under-estimated the costs of the PPACA. –Oversight Committee

To recap, distinct cultural and regulatory environments in each state, differences between Romneycare and Obamacare in the ease of access to subsidies, and small business and employee incentives—should call into question the assumptions that have been used to predict employer behavior under the federal law by CBO.

The budgetary impact of Obamacare could result in a third unsustainable health care related entitlement, requiring major reform in order to save America’s future economic viability. Fiscal cliff round 2 may be calling.